ation. As such, portfolio managers
were unenthusiastic about working
for pension plans as it meant taking
a sizeable pay cut. The cultural
differences in terms of working
environment also did not appeal
to asset managers acclimatised to
to a fast-paced daily routine. The
due diligence executive disagreed.

“Very few asset managers are hiring at the moment, so ex-fund managers are on the job market,” he
said. Pension funds are increasingly
consolidating as they seek to attain
scale. Discussions are underway in
the UK, for example, to merge 89
local authority pension funds into
just eight funds. The cost savings of
such consolidation – assuming the
policy goes ahead – could be re-in-vested into internal processes and
personnel. In other words, it could
enable investors to exit a number
of external managers and increasingly manage capital in-house.

SWFs and pension funds should
assess whether it is economically
worthwhile to incur these overheads.

“Cost is one factor behind bringing asset management in-house but
another factor is expertise. Large
pension funds and other investors
will be reluctant to allocate funds
to managers that have a limited
track record and meagre Assets under Management (AuM). Some of
the senior investment personnel at
pension funds may want to manage
third party assets in the future and
developing an in-house team could
be a way for them to nurture this
expertise. This is a trend I expect
to see increase following the
reforms in the Local Government
Pension Schemes in the UK,” adds
Pearce.

A challenge faced by pensionfunds traditionally was that theycould not compete with majorasset managers on staff remuner-SWFs and big pension funds havebeen internalising asset man-agement for a while. We haveseen an increasing number of USendowments and family officerslook to internalise asset manage-ment. Admittedly, there are costsassociated with this like buildingup portfolio management systemsand purchasing Bloombergterminals. However, a lot of themiddle and back office work andoperational due diligence can beoutsourced. As these organisa-tions are not managing third partyassets, they are not subject to thatmuch more regulation. However,these mid-smaller sized inves-tors will probably only insourcevanilla strategies such as long/short equity as opposed to esotericasset classes,” says an operationaldue diligence executive at a majorasset manager in London.

But what are the reasons behind
internalising asset management?

Cost is a big factor. Many asset
managers are not delivering the
returns their investors expect
given the fees they pay. SWFs and
a handful of large pension funds
have the resources to internalise
asset management. Some large investors are undertaking cost benefit analysis on whether they should
continue outsourcing management
or bring it in-house. If it is cheaper
to conduct asset management
in-house and subsequent performance proves solid, investors will
see increased returns as they are
not paying fees and other expenses
to third party managers. Internalising asset management could also
save money on operational due
diligence costs. However, there
would be added expenses such as
new reporting requirements and an
enhanced technology spend. These
are not insignificant burdens and